Definition: Moral hazard
In general, a feature of insurance that arises when the provision of insurance increases the probability of the occurrence of the event being insured against, usually because the insurance diminishes the incentives for the insured party to take preventive actions. For example, banks may lend for riskier ventures than they otherwise would if they expect losses to be effectively covered by the government through deposit insurance or otherwise. On an international level, recourse to International Monetary Fund (IMF) financing may generate moral hazard on the part of both borrowers and lenders, leading to less due diligence by private lenders, and allowing borrowing governments to incur larger debts and get by with weaker policies and institutions. Hence, the availability of IMF financing, while offering a cushion to countries in times of financial crises, may increase the likelihood of such crises occurring.
International Monetary Fund (IMF), "Online glossary of selected financial terms" (as per March 15th, 2008), International Monetary Fund, Washington D.C., 2008